(Markets are looking a hair calmer Tuesday – the Nikkei nearly recouped all of its prior-day losses, U.S. stock futures rose a bit, though Europe stocks were lower. That’s after Monday’s chaos, triggered those plans to levy deposit holders in Cyprus. )

J.P. Morgan Cazenove says Cyprus is between a rock and a hard place and predicts its parliament will refuse to pass the deposit levy/bailout package in current terms. The analysts give Cyprus three options, none of them great:

Insured depositors pay nothing, uninsured pay 15.4%. This isn’t workable because the bulk of that would fall on Russia, who would then likely play hardball with its existing €2.5 billion loan to Cyprus. And Cyprus needs that money.

Ask for more Troika support. But J.P. Morgan says it’s unlikely Cyprus is going to get much tweaking on the deal hammered out.

Tweak the deal so that less pain falls on insured depositors, such as those with less than €100,000 pay 3%, those with less than €500,000 pay 10% and more than €500,000 pay 14%. J.P. Morgan says this looks like “shifting deckchairs,” and Cypriots are likely to stay angry no matter what.

J.P. Morgan says the government could delay that parliamentary vote several days, or worst-case, find no solution. And what the whole mess has shown is that risk is acceptable in the brave new OMT world (that bond-buying program that still hasn’t been tapped). Oh and Germany has shown a far more hawkish side than anyone expected.

“Essentially, we are seeing the rise of ’the Germany that can say no.’

But now European depositors are going to see they’re taking a big risk in leaving funds in weak banks backed by weak sovereigns and that could push up rates. Bank funding in the periphery will in short, get messy.

“In our opinion, there is a good case to say that the Cyprus crisis may blow over in the near-term, but the long-term breach of faith between Euro area policymakers and regional depositors will remain (even if the insureds are ultimately made whole). Despite the muted reaction so far, Europe has reminded investors that there are significant problems behind the curtain.”

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